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Self Employment Taxes

Self employment taxes 7. Self employment taxes Costs You Can Deduct or Capitalize Table of Contents What's New Introduction Topics - This chapter discusses: Useful Items - You may want to see: Carrying Charges Research and Experimental CostsProduct. Self employment taxes Costs not included. Self employment taxes Intangible Drilling Costs Exploration CostsPartnerships and S corporations. Self employment taxes Development Costs Circulation Costs Business Start-Up and Organizational Costs Reforestation Costs Retired Asset Removal Costs Barrier Removal CostsOther barrier removals. Self employment taxes Film and Television Production Costs What's New Film and television productions costs. Self employment taxes The election to expense film and television production costs does not apply to productions that begin after December 31, 2013. Self employment taxes See Film and Television Production Costs , later. Self employment taxes Introduction This chapter discusses costs you can elect to deduct or capitalize. Self employment taxes You generally deduct a cost as a current business expense by subtracting it from your income in either the year you incur it or the year you pay it. Self employment taxes If you capitalize a cost, you may be able to recover it over a period of years through periodic deductions for amortization, depletion, or depreciation. Self employment taxes When you capitalize a cost, you add it to the basis of property to which it relates. Self employment taxes A partnership, corporation, estate, or trust makes the election to deduct or capitalize the costs discussed in this chapter except for exploration costs for mineral deposits. Self employment taxes Each individual partner, shareholder, or beneficiary elects whether to deduct or capitalize exploration costs. Self employment taxes You may be subject to the alternative minimum tax (AMT) if you deduct research and experimental, intangible drilling, exploration, development, circulation, or business organizational costs. Self employment taxes For more information on the alternative minimum tax, see the instructions for the following forms. Self employment taxes Form 6251, Alternative Minimum Tax—Individuals. Self employment taxes Form 4626, Alternative Minimum Tax—Corporations. Self employment taxes Topics - This chapter discusses: Carrying charges Research and experimental costs Intangible drilling costs Exploration costs Development costs Circulation costs Qualified disaster expenses Business start-up and organizational costs Reforestation costs Retired asset removal costs Barrier removal costs Film and television production costs Useful Items - You may want to see: Publication 544 Sales and Other Dispositions of Assets Form (and Instructions) 3468 Investment Credit 8826 Disabled Access Credit See chapter 12 for information about getting publications and forms. Self employment taxes Carrying Charges Carrying charges include the taxes and interest you pay to carry or develop real property or to carry, transport, or install personal property. Self employment taxes Certain carrying charges must be capitalized under the uniform capitalization rules. Self employment taxes (For information on capitalization of interest, see chapter 4 . Self employment taxes ) You can elect to capitalize carrying charges not subject to the uniform capitalization rules, but only if they are otherwise deductible. Self employment taxes You can elect to capitalize carrying charges separately for each project you have and for each type of carrying charge. Self employment taxes For unimproved and unproductive real property, your election is good for only 1 year. Self employment taxes You must decide whether to capitalize carrying charges each year the property remains unimproved and unproductive. Self employment taxes For other real property, your election to capitalize carrying charges remains in effect until construction or development is completed. Self employment taxes For personal property, your election is effective until the date you install or first use it, whichever is later. Self employment taxes How to make the election. Self employment taxes To make the election to capitalize a carrying charge, attach a statement to your original tax return for the year the election is to be effective indicating which charges you are electing to capitalize. Self employment taxes However, if you timely filed your return for the year without making the election, you can still make the election by filing an amended return within 6 months of the due date of the return (excluding extensions). Self employment taxes Attach the statement to the amended return and write “Filed pursuant to section 301. Self employment taxes 9100-2” on the statement. Self employment taxes File the amended return at the same address you filed the original return. Self employment taxes Research and Experimental Costs The costs of research and experimentation are generally capital expenses. Self employment taxes However, you can elect to deduct these costs as a current business expense. Self employment taxes Your election to deduct these costs is binding for the year it is made and for all later years unless you get IRS approval to make a change. Self employment taxes If you meet certain requirements, you may elect to defer and amortize research and experimental costs. Self employment taxes For information on electing to defer and amortize these costs, see Research and Experimental Costs in chapter 8. Self employment taxes Research and experimental costs defined. Self employment taxes Research and experimental costs are reasonable costs you incur in your trade or business for activities intended to provide information that would eliminate uncertainty about the development or improvement of a product. Self employment taxes Uncertainty exists if the information available to you does not establish how to develop or improve a product or the appropriate design of a product. Self employment taxes Whether costs qualify as research and experimental costs depends on the nature of the activity to which the costs relate rather than on the nature of the product or improvement being developed or the level of technological advancement. Self employment taxes The costs of obtaining a patent, including attorneys' fees paid or incurred in making and perfecting a patent application, are research and experimental costs. Self employment taxes However, costs paid or incurred to obtain another's patent are not research and experimental costs. Self employment taxes Product. Self employment taxes The term “product” includes any of the following items. Self employment taxes Formula. Self employment taxes Invention. Self employment taxes Patent. Self employment taxes Pilot model. Self employment taxes Process. Self employment taxes Technique. Self employment taxes Property similar to the items listed above. Self employment taxes It also includes products used by you in your trade or business or held for sale, lease, or license. Self employment taxes Costs not included. Self employment taxes Research and experimental costs do not include expenses for any of the following activities. Self employment taxes Advertising or promotions. Self employment taxes Consumer surveys. Self employment taxes Efficiency surveys. Self employment taxes Management studies. Self employment taxes Quality control testing. Self employment taxes Research in connection with literary, historical, or similar projects. Self employment taxes The acquisition of another's patent, model, production, or process. Self employment taxes When and how to elect. Self employment taxes You make the election to deduct research and experimental costs by deducting them on your tax return for the year in which you first pay or incur research and experimental costs. Self employment taxes If you do not make the election to deduct research and experimental costs in the first year in which you pay or incur the costs, you can deduct the costs in a later year only with approval from the IRS. Self employment taxes Deducting or Amortizing Research and Experimentation Costs IF you . Self employment taxes . Self employment taxes . Self employment taxes THEN . Self employment taxes . Self employment taxes . Self employment taxes Elect to deduct research and experimental costs as a current business expense Deduct all research and experimental costs in the first year you pay or incur the costs and all later years. Self employment taxes Do not deduct research and experimental costs as a current business expense If you meet the requirements, amortize them over at least 60 months, starting with the month you first receive an economic benefit from the research. Self employment taxes See Research and Experimental Costs in chapter 8. Self employment taxes Research credit. Self employment taxes If you pay or incur qualified research expenses, you may be able to take the research credit. Self employment taxes For more information see Form 6765, Credit for Increasing Research Activities and its instructions. Self employment taxes Intangible Drilling Costs The costs of developing oil, gas, or geothermal wells are ordinarily capital expenditures. Self employment taxes You can usually recover them through depreciation or depletion. Self employment taxes However, you can elect to deduct intangible drilling costs (IDCs) as a current business expense. Self employment taxes These are certain drilling and development costs for wells in the United States in which you hold an operating or working interest. Self employment taxes You can deduct only costs for drilling or preparing a well for the production of oil, gas, or geothermal steam or hot water. Self employment taxes You can elect to deduct only the costs of items with no salvage value. Self employment taxes These include wages, fuel, repairs, hauling, and supplies related to drilling wells and preparing them for production. Self employment taxes Your cost for any drilling or development work done by contractors under any form of contract is also an IDC. Self employment taxes However, see Amounts paid to contractor that must be capitalized , later. Self employment taxes You can also elect to deduct the cost of drilling exploratory bore holes to determine the location and delineation of offshore hydrocarbon deposits if the shaft is capable of conducting hydrocarbons to the surface on completion. Self employment taxes It does not matter whether there is any intent to produce hydrocarbons. Self employment taxes If you do not elect to deduct your IDCs as a current business expense, you can elect to deduct them over the 60-month period beginning with the month they were paid or incurred. Self employment taxes Amounts paid to contractor that must be capitalized. Self employment taxes Amounts paid to a contractor must be capitalized if they are either: Amounts properly allocable to the cost of depreciable property, or Amounts paid only out of production or proceeds from production if these amounts are depletable income to the recipient. Self employment taxes How to make the election. Self employment taxes You elect to deduct IDCs as a current business expense by taking the deduction on your income tax return for the first tax year you have eligible costs. Self employment taxes No formal statement is required. Self employment taxes If you file Schedule C (Form 1040), enter these costs under “Other expenses. Self employment taxes ” For oil and gas wells, your election is binding for the year it is made and for all later years. Self employment taxes For geothermal wells, your election can be revoked by the filing of an amended return on which you do not take the deduction. Self employment taxes You can file the amended return for the year up to the normal time of expiration for filing a claim for credit or refund, generally, within 3 years after the date you filed the original return or within 2 years after the date you paid the tax, whichever is later. Self employment taxes Energy credit for costs of geothermal wells. Self employment taxes If you capitalize the drilling and development costs of geothermal wells that you place in service during the tax year, you may be able to claim a business energy credit. Self employment taxes See the Instructions for Form 3468 for more information. Self employment taxes Nonproductive well. Self employment taxes If you capitalize your IDCs, you have another option if the well is nonproductive. Self employment taxes You can deduct the IDCs of the nonproductive well as an ordinary loss. Self employment taxes You must indicate and clearly state your election on your tax return for the year the well is completed. Self employment taxes Once made, the election for oil and gas wells is binding for all later years. Self employment taxes You can revoke your election for a geothermal well by filing an amended return that does not claim the loss. Self employment taxes Costs incurred outside the United States. Self employment taxes You cannot deduct as a current business expense all the IDCs paid or incurred for an oil, gas, or geothermal well located outside the United States. Self employment taxes However, you can elect to include the costs in the adjusted basis of the well to figure depletion or depreciation. Self employment taxes If you do not make this election, you can deduct the costs over the 10-year period beginning with the tax year in which you paid or incurred them. Self employment taxes These rules do not apply to a nonproductive well. Self employment taxes Exploration Costs The costs of determining the existence, location, extent, or quality of any mineral deposit are ordinarily capital expenditures if the costs lead to the development of a mine. Self employment taxes You recover these costs through depletion as the mineral is removed from the ground. Self employment taxes However, you can elect to deduct domestic exploration costs paid or incurred before the beginning of the development stage of the mine (except those for oil and gas wells). Self employment taxes How to make the election. Self employment taxes You elect to deduct exploration costs by taking the deduction on your income tax return, or on an amended income tax return, for the first tax year for which you wish to deduct the costs paid or incurred during the tax year. Self employment taxes Your return must adequately describe and identify each property or mine, and clearly state how much is being deducted for each one. Self employment taxes The election applies to the tax year you make this election and all later tax years. Self employment taxes Partnerships and S corporations. Self employment taxes Each partner, not the partnership, elects whether to capitalize or to deduct that partner's share of exploration costs. Self employment taxes Each shareholder, not the S corporation, elects whether to capitalize or to deduct that shareholder's share of exploration costs. Self employment taxes Reduced corporate deductions for exploration costs. Self employment taxes A corporation (other than an S corporation) can deduct only 70% of its domestic exploration costs. Self employment taxes It must capitalize the remaining 30% of costs and amortize them over the 60-month period starting with the month the exploration costs are paid or incurred. Self employment taxes A corporation may also elect to capitalize and amortize mining exploration costs over a 10-year period. Self employment taxes For more information on this method of amortization, see Internal Revenue Code section 59(e). Self employment taxes The 30% the corporation capitalizes cannot be added to its basis in the property to figure cost depletion. Self employment taxes However, the amount amortized is treated as additional depreciation and is subject to recapture as ordinary income on a disposition of the property. Self employment taxes See Section 1250 Property under Depreciation Recapture in chapter 3 of Publication 544. Self employment taxes These rules also apply to the deduction of development costs by corporations. Self employment taxes See Development Costs , later. Self employment taxes Recapture of exploration expenses. Self employment taxes When your mine reaches the producing stage, you must recapture any exploration costs you elected to deduct. Self employment taxes Use either of the following methods. Self employment taxes Method 1—Include the deducted costs in gross income for the tax year the mine reaches the producing stage. Self employment taxes Your election must be clearly indicated on the return. Self employment taxes Increase your adjusted basis in the mine by the amount included in income. Self employment taxes Generally, you must elect this recapture method by the due date (including extensions) of your return. Self employment taxes However, if you timely filed your return for the year without making the election, you can still make the election by filing an amended return within 6 months of the due date of the return (excluding extensions). Self employment taxes Make the election on your amended return and write “Filed pursuant to section 301. Self employment taxes 9100-2” on the form where you are including the income. Self employment taxes File the amended return at the same address you filed the original return. Self employment taxes Method 2—Do not claim any depletion deduction for the tax year the mine reaches the producing stage and any later tax years until the depletion you would have deducted equals the exploration costs you deducted. Self employment taxes You also must recapture deducted exploration costs if you receive a bonus or royalty from mine property before it reaches the producing stage. Self employment taxes Do not claim any depletion deduction for the tax year you receive the bonus or royalty and any later tax years until the depletion you would have deducted equals the exploration costs you deducted. Self employment taxes Generally, if you dispose of the mine before you have fully recaptured the exploration costs you deducted, recapture the balance by treating all or part of your gain as ordinary income. Self employment taxes Under these circumstances, you generally treat as ordinary income all of your gain if it is less than your adjusted exploration costs with respect to the mine. Self employment taxes If your gain is more than your adjusted exploration costs, treat as ordinary income only a part of your gain, up to the amount of your adjusted exploration costs. Self employment taxes Foreign exploration costs. Self employment taxes If you pay or incur exploration costs for a mine or other natural deposit located outside the United States, you cannot deduct all the costs in the current year. Self employment taxes You can elect to include the costs (other than for an oil, gas, or geothermal well) in the adjusted basis of the mineral property to figure cost depletion. Self employment taxes (Cost depletion is discussed in chapter 9 . Self employment taxes ) If you do not make this election, you must deduct the costs over the 10-year period beginning with the tax year in which you pay or incur them. Self employment taxes These rules also apply to foreign development costs. Self employment taxes Development Costs You can deduct costs paid or incurred during the tax year for developing a mine or any other natural deposit (other than an oil or gas well) located in the United States. Self employment taxes These costs must be paid or incurred after the discovery of ores or minerals in commercially marketable quantities. Self employment taxes Development costs also include depreciation on improvements used in the development of ores or minerals and costs incurred for you by a contractor. Self employment taxes Development costs do not include the costs for the acquisition or improvement of depreciable property. Self employment taxes Instead of deducting development costs in the year paid or incurred, you can elect to treat the cost as deferred expenses and deduct them ratably as the units of produced ores or minerals benefited by the expenses are sold. Self employment taxes This election applies each tax year to expenses paid or incurred in that year. Self employment taxes Once made, the election is binding for the year and cannot be revoked for any reason. Self employment taxes How to make the election. Self employment taxes The election to deduct development costs ratably as the ores or minerals are sold must be made for each mine or other natural deposit by a clear indication on your return or by a statement filed with the IRS office where you file your return. Self employment taxes Generally, you must make the election by the due date of the return (including extensions). Self employment taxes However, if you timely filed your return for the year without making the election, you can still make the election by filing an amended return within 6 months of the due date of the return (excluding extensions). Self employment taxes Clearly indicate the election on your amended return and write “Filed pursuant to section 301. Self employment taxes 9100-2. Self employment taxes ” File the amended return at the same address you filed the original return. Self employment taxes Foreign development costs. Self employment taxes The rules discussed earlier for foreign exploration costs apply to foreign development costs. Self employment taxes Reduced corporate deductions for development costs. Self employment taxes The rules discussed earlier for reduced corporate deductions for exploration costs also apply to corporate deductions for development costs. Self employment taxes Circulation Costs A publisher can deduct as a current business expense the costs of establishing, maintaining, or increasing the circulation of a newspaper, magazine, or other periodical. Self employment taxes For example, a publisher can deduct the cost of hiring extra employees for a limited time to get new subscriptions through telephone calls. Self employment taxes Circulation costs are deductible even if they normally would be capitalized. Self employment taxes This rule does not apply to the following costs that must be capitalized. Self employment taxes The purchase of land or depreciable property. Self employment taxes The acquisition of circulation through the purchase of any part of the business of another publisher of a newspaper, magazine, or other periodical, including the purchase of another publisher's list of subscribers. Self employment taxes Other treatment of circulation costs. Self employment taxes If you do not want to deduct circulation costs as a current business expense, you can elect one of the following ways to recover these costs. Self employment taxes Capitalize all circulation costs that are properly chargeable to a capital account (see chapter 1 ). Self employment taxes Amortize circulation costs over the 3-year period beginning with the tax year they were paid or incurred. Self employment taxes How to make the election. Self employment taxes You elect to capitalize circulation costs by attaching a statement to your return for the first tax year the election applies. Self employment taxes Your election is binding for the year it is made and for all later years, unless you get IRS approval to revoke it. Self employment taxes Business Start-Up and Organizational Costs Business start-up and organizational costs are generally capital expenditures. Self employment taxes However, you can elect to deduct up to $5,000 of business start-up and $5,000 of organizational costs paid or incurred after October 22, 2004. Self employment taxes The $5,000 deduction is reduced by the amount your total start-up or organizational costs exceed $50,000. Self employment taxes Any remaining costs must be amortized. Self employment taxes For information about amortizing start-up and organizational costs, see chapter 8 . Self employment taxes Start-up costs include any amounts paid or incurred in connection with creating an active trade or business or investigating the creation or acquisition of an active trade or business. Self employment taxes Organizational costs include the costs of creating a corporation. Self employment taxes For more information on start-up and organizational costs, see chapter 8 . Self employment taxes How to make the election. Self employment taxes You elect to deduct the start-up or organizational costs by claiming the deduction on your income tax return (filed by the due date including extensions) for the tax year in which the active trade or business begins. Self employment taxes However, if you timely filed your return for the year without making the election, you can still make the election by filing an amended return within 6 months of the due date of the return (excluding extensions). Self employment taxes Clearly indicate the election on your amended return and write “Filed pursuant to section 301. Self employment taxes 9100-2. Self employment taxes ” File the amended return at the same address you filed the original return. Self employment taxes The election applies when computing taxable income for the current tax year and all subsequent years. Self employment taxes Reforestation Costs Reforestation costs are generally capital expenditures. Self employment taxes However, you can elect to deduct up to $10,000 ($5,000 if married filing separately; $0 for a trust) of qualifying reforestation costs paid or incurred after October 22, 2004, for each qualified timber property. Self employment taxes The remaining costs can be amortized over an 84-month period. Self employment taxes For information about amortizing reforestation costs, see chapter 8 . Self employment taxes Qualifying reforestation costs are the direct costs of planting or seeding for forestation or reforestation. Self employment taxes Qualified timber property is property that contains trees in significant commercial quantities. Self employment taxes See chapter 8 for more information on qualifying reforestation costs and qualified timber property. Self employment taxes If you elect to deduct qualified reforestation costs, create and maintain separate timber accounts for each qualified timber property and include all reforestation costs and the dates each was applied. Self employment taxes Do not include this qualified timber property in any account (for example, depletion block) for which depletion is allowed. Self employment taxes How to make the election. Self employment taxes You elect to deduct qualifying reforestation costs by claiming the deduction on your timely filed income tax return (including extensions) for the tax year the expenses were paid or incurred. Self employment taxes If Form T (Timber), Forest Activities Schedule, is required, complete Part IV of Form T. Self employment taxes If Form T is not required, attach a statement containing the following information for each qualified timber property for which an election is being made. Self employment taxes The unique stand identification numbers. Self employment taxes The total number of acres reforested during the tax year. Self employment taxes The nature of the reforestation treatments. Self employment taxes The total amounts of qualified reforestation expenditures eligible to be amortized or deducted. Self employment taxes If you timely filed your return for the year without making the election, you can still make the election by filing an amended return within 6 months of the due date of the return (excluding extensions). Self employment taxes Clearly indicate the election on your amended return and write “Filed pursuant to section 301. Self employment taxes 9100-2. Self employment taxes ” File the amended return at the same address you filed the original return. Self employment taxes The election applies when computing taxable income for the current tax year and all subsequent years. Self employment taxes For additional information on reforestation costs, see chapter 8 . Self employment taxes Recapture. Self employment taxes This deduction may have to be recaptured as ordinary income under section 1245 when you sell or otherwise dispose of the property that would have received an addition to basis if you had not elected to deduct the expenditure. Self employment taxes For more information on recapturing the deduction, see Depreciation Recapture in Publication 544. Self employment taxes Retired Asset Removal Costs If you retire and remove a depreciable asset in connection with the installation or production of a replacement asset, you can deduct the costs of removing the retired asset. Self employment taxes However, if you replace a component (part) of a depreciable asset, capitalize the removal costs if the replacement is an improvement and deduct the costs if the replacement is a repair. Self employment taxes Barrier Removal Costs The cost of an improvement to a business asset is normally a capital expense. Self employment taxes However, you can elect to deduct the costs of making a facility or public transportation vehicle more accessible to and usable by those who are disabled or elderly. Self employment taxes You must own or lease the facility or vehicle for use in connection with your trade or business. Self employment taxes A facility is all or any part of buildings, structures, equipment, roads, walks, parking lots, or similar real or personal property. Self employment taxes A public transportation vehicle is a vehicle, such as a bus or railroad car, that provides transportation service to the public (including service for your customers, even if you are not in the business of providing transportation services). Self employment taxes You cannot deduct any costs that you paid or incurred to completely renovate or build a facility or public transportation vehicle or to replace depreciable property in the normal course of business. Self employment taxes Deduction limit. Self employment taxes The most you can deduct as a cost of removing barriers to the disabled and the elderly for any tax year is $15,000. Self employment taxes However, you can add any costs over this limit to the basis of the property and depreciate these excess costs. Self employment taxes Partners and partnerships. Self employment taxes The $15,000 limit applies to a partnership and also to each partner in the partnership. Self employment taxes A partner can allocate the $15,000 limit in any manner among the partner's individually incurred costs and the partner's distributive share of partnership costs. Self employment taxes If the partner cannot deduct the entire share of partnership costs, the partnership can add any costs not deducted to the basis of the improved property. Self employment taxes A partnership must be able to show that any amount added to basis was not deducted by the partner and that it was over a partner's $15,000 limit (as determined by the partner). Self employment taxes If the partnership cannot show this, it is presumed that the partner was able to deduct the distributive share of the partnership's costs in full. Self employment taxes Example. Self employment taxes Emilio Azul's distributive share of ABC partnership's deductible expenses for the removal of architectural barriers was $14,000. Self employment taxes Emilio had $12,000 of similar expenses in his sole proprietorship. Self employment taxes He elected to deduct $7,000 of them. Self employment taxes Emilio allocated the remaining $8,000 of the $15,000 limit to his share of ABC's expenses. Self employment taxes Emilio can add the excess $5,000 of his own expenses to the basis of the property used in his business. Self employment taxes Also, if ABC can show that Emilio could not deduct $6,000 ($14,000 – $8,000) of his share of the partnership's expenses because of how Emilio applied the limit, ABC can add $6,000 to the basis of its property. Self employment taxes Qualification standards. Self employment taxes You can deduct your costs as a current expense only if the barrier removal meets the guidelines and requirements issued by the Architectural and Transportation Barriers Compliance Board under the Americans with Disabilities Act (ADA) of 1990. Self employment taxes You can view the Americans with Disabilities Act at www. Self employment taxes ada. Self employment taxes gov/pubs/ada. Self employment taxes htm. Self employment taxes The following is a list of some architectural barrier removal costs that can be deducted. Self employment taxes Ground and floor surfaces. Self employment taxes Walks. Self employment taxes Parking lots. Self employment taxes Ramps. Self employment taxes Entrances. Self employment taxes Doors and doorways. Self employment taxes Stairs. Self employment taxes Floors. Self employment taxes Toilet rooms. Self employment taxes Water fountains. Self employment taxes Public telephones. Self employment taxes Elevators. Self employment taxes Controls. Self employment taxes Signage. Self employment taxes Alarms. Self employment taxes Protruding objects. Self employment taxes Symbols of accessibility. Self employment taxes You can find the ADA guidelines and requirements for architectural barrier removal at www. Self employment taxes usdoj. Self employment taxes gov/crt/ada/reg3a. Self employment taxes html. Self employment taxes The costs for removal of transportation barriers from rail facilities, buses, and rapid and light rail vehicles are deductible. Self employment taxes You can find the guidelines and requirements for transportation barrier removal at www. Self employment taxes fta. Self employment taxes dot. Self employment taxes gov. Self employment taxes Also, you can access the ADA website at www. Self employment taxes ada. Self employment taxes gov for additional information. Self employment taxes Other barrier removals. Self employment taxes To be deductible, expenses of removing any barrier not covered by the above standards must meet all three of the following tests. Self employment taxes The removed barrier must be a substantial barrier to access or use of a facility or public transportation vehicle by persons who have a disability or are elderly. Self employment taxes The removed barrier must have been a barrier for at least one major group of persons who have a disability or are elderly (such as people who are blind, deaf, or wheelchair users). Self employment taxes The barrier must be removed without creating any new barrier that significantly impairs access to or use of the facility or vehicle by a major group of persons who have a disability or are elderly. Self employment taxes How to make the election. Self employment taxes If you elect to deduct your costs for removing barriers to the disabled or the elderly, claim the deduction on your income tax return (partnership return for partnerships) for the tax year the expenses were paid or incurred. Self employment taxes Identify the deduction as a separate item. Self employment taxes The election applies to all the qualifying costs you have during the year, up to the $15,000 limit. Self employment taxes If you make this election, you must maintain adequate records to support your deduction. Self employment taxes For your election to be valid, you generally must file your return by its due date, including extensions. Self employment taxes However, if you timely filed your return for the year without making the election, you can still make the election by filing an amended return within 6 months of the due date of the return (excluding extensions). Self employment taxes Clearly indicate the election on your amended return and write “Filed pursuant to section 301. Self employment taxes 9100-2. Self employment taxes ” File the amended return at the same address you filed the original return. Self employment taxes Your election is irrevocable after the due date, including extensions, of your return. Self employment taxes Disabled access credit. Self employment taxes If you make your business accessible to persons with disabilities and your business is an eligible small business, you may be able to claim the disabled access credit. Self employment taxes If you choose to claim the credit, you must reduce the amount you deduct or capitalize by the amount of the credit. Self employment taxes For more information, see Form 8826, Disabled Access Credit. Self employment taxes Film and Television Production Costs Film and television production costs are generally capital expenses. Self employment taxes However, you can elect to deduct costs paid or incurred for certain productions commencing before January 1, 2014. Self employment taxes For more information, see section 181 of the Internal Revenue Code and the related Treasury Regulations. Self employment taxes Prev Up Next Home More Online Publications

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The Self Employment Taxes

Self employment taxes 4. Self employment taxes Farm Business Expenses Table of Contents What's New for 2013 Introduction Topics - This chapter discusses: Useful Items - You may want to see: Deductible ExpensesReasonable allocation. Self employment taxes Prepaid Farm Supplies Prepaid Livestock Feed Labor Hired Repairs and Maintenance Interest Breeding Fees Fertilizer and Lime Taxes Insurance Rent and Leasing Depreciation Business Use of Your Home Truck and Car Expenses Travel Expenses Marketing Quota Penalties Tenant House Expenses Items Purchased for Resale Other Expenses Domestic Production Activities Deduction Capital ExpensesForestation and reforestation costs. Self employment taxes Nondeductible ExpensesPersonal, Living, and Family Expenses Other Nondeductible Items Losses From Operating a FarmAt-Risk Limits Passive Activity Limits Excess Farm Loss Limit Not-for-Profit FarmingUsing the presumption later. Self employment taxes Category 1. Self employment taxes Category 2. Self employment taxes Category 3. Self employment taxes What's New for 2013 Standard mileage rate. Self employment taxes For 2013, the standard mileage rate for the cost of operating your car, van, pickup, or panel truck for each mile of business use is 56. Self employment taxes 5 cents. Self employment taxes See Truck and Car Expenses , later. Self employment taxes Simplified method for business use of home deduction. Self employment taxes The IRS now provides a simplified method to determine your expenses for business use of your home. Self employment taxes For more information, see Schedule C (Form 1040), Part II, and its instructions. Self employment taxes Introduction You can generally deduct the current costs of operating your farm. Self employment taxes Current costs are expenses you do not have to capitalize or include in inventory costs. Self employment taxes However, your deduction for the cost of livestock feed and certain other supplies may be limited. Self employment taxes If you have an operating loss, you may not be able to deduct all of it. Self employment taxes Topics - This chapter discusses: Deductible expenses Domestic production activities deduction Capital expenses Nondeductible expenses Losses from operating a farm Not-for-profit farming Useful Items - You may want to see: Publication 463 Travel, Entertainment, Gift, and Car Expenses 535 Business Expenses 587 Business Use of Your Home 925 Passive Activity and At-Risk Rules 936 Home Mortgage Interest Deduction Form (and Instructions) Sch A (Form 1040) Itemized Deductions Sch F (Form 1040) Profit or Loss From Farming 1045 Application for Tentative Refund 5213 Election To Postpone Determination as To Whether the Presumption Applies That an Activity Is Engaged in for Profit 8903 Domestic Production Activities Deduction See chapter 16 for information about getting publications and forms. Self employment taxes Deductible Expenses The ordinary and necessary costs of operating a farm for profit are deductible business expenses. Self employment taxes “Ordinary” means what most farmers do and “necessary” means what is useful and helpful in farming. Self employment taxes Schedule F, Part II, lists some common farm expenses that are typically deductible. Self employment taxes This chapter discusses many of these expenses, as well as others not listed on Schedule F. Self employment taxes Reimbursed expenses. Self employment taxes If the reimbursement is received in the same year that the expense is claimed, reduce the expense by the amount of the reimbursement. Self employment taxes If the reimbursement is received in a year after the expense is claimed, include the reimbursement amount in income. Self employment taxes See Refund or reimbursement under Income From Other Sources in chapter 3. Self employment taxes Personal and business expenses. Self employment taxes Some expenses you pay during the tax year may be part personal and part business. Self employment taxes These may include expenses for gasoline, oil, fuel, water, rent, electricity, telephone, automobile upkeep, repairs, insurance, interest, and taxes. Self employment taxes You must allocate these mixed expenses between their business and personal parts. Self employment taxes Generally, the personal part of these expenses is not deductible. Self employment taxes The business portion of the expenses is deductible on Schedule F. Self employment taxes Example. Self employment taxes You paid $1,500 for electricity during the tax year. Self employment taxes You used 1/3 of the electricity for personal purposes and 2/3 for farming. Self employment taxes Under these circumstances, you can deduct $1,000 (2/3 of $1,500) of your electricity expense as a farm business expense. Self employment taxes Reasonable allocation. Self employment taxes It is not always easy to determine the business and nonbusiness parts of an expense. Self employment taxes There is no method of allocation that applies to all mixed expenses. Self employment taxes Any reasonable allocation is acceptable. Self employment taxes What is reasonable depends on the circumstances in each case. Self employment taxes Prepaid Farm Supplies Prepaid farm supplies include the following items if paid for during the year. Self employment taxes Feed, seed, fertilizer, and similar farm supplies not used or consumed during the year, but not including farm supplies that you would have consumed during the year if not for a fire, storm, flood, other casualty, disease, or drought. Self employment taxes Poultry (including egg-laying hens and baby chicks) bought for use (or for both use and resale) in your farm business. Self employment taxes However, include only the amount that would be deductible in the following year if you had capitalized the cost and deducted it ratably over the lesser of 12 months or the useful life of the poultry. Self employment taxes Poultry bought for resale and not resold during the year. Self employment taxes Deduction limit. Self employment taxes If you use the cash method of accounting to report your income and expenses, your deduction for prepaid farm supplies in the year you pay for them may be limited to 50% of your other deductible farm expenses for the year (all Schedule F deductions except prepaid farm supplies). Self employment taxes This limit does not apply if you meet one of the exceptions described later. Self employment taxes See Chapter 2 for a discussion of the cash method of accounting. Self employment taxes If the limit applies, you can deduct the excess cost of farm supplies other than poultry in the year you use or consume the supplies. Self employment taxes The excess cost of poultry bought for use (or for both use and resale) in your farm business is deductible in the year following the year you pay for it. Self employment taxes The excess cost of poultry bought for resale is deductible in the year you sell or otherwise dispose of that poultry. Self employment taxes Example. Self employment taxes You may not qualify for the exception described next. Self employment taxes During 2013, you bought fertilizer ($4,000), feed ($1,000), and seed ($500) for use on your farm in the following year. Self employment taxes Your total prepaid farm supplies expense for 2013 is $5,500. Self employment taxes Your other deductible farm expenses totaled $10,000 for 2013. Self employment taxes Therefore, your deduction for prepaid farm supplies cannot be more than $5,000 (50% of $10,000) for 2013. Self employment taxes The excess prepaid farm supplies expense of $500 ($5,500 − $5,000) is deductible in a later tax year when you use or consume the supplies. Self employment taxes Exceptions. Self employment taxes This limit on the deduction for prepaid farm supplies expense does not apply if you are a farm-related taxpayer and either of the following apply. Self employment taxes Your prepaid farm supplies expense is more than 50% of your other deductible farm expenses because of a change in business operations caused by unusual circumstances. Self employment taxes Your total prepaid farm supplies expense for the preceding 3 tax years is less than 50% of your total other deductible farm expenses for those 3 tax years. Self employment taxes You are a farm-related taxpayer if any of the following tests apply. Self employment taxes Your main home is on a farm. Self employment taxes Your principal business is farming. Self employment taxes A member of your family meets (1) or (2). Self employment taxes For this purpose, your family includes your brothers and sisters, half-brothers and half-sisters, spouse, parents, grandparents, children, grandchildren, and aunts and uncles and their children. Self employment taxes Whether or not the deduction limit for prepaid farm supplies applies, your expenses for prepaid livestock feed may be subject to the rules for advance payment of livestock feed, discussed next. Self employment taxes Prepaid Livestock Feed If you report your income and expenses under the cash method of accounting, you cannot deduct in the year paid the cost of feed your livestock will consume in a later year unless you meet all the following tests. Self employment taxes The payment is for the purchase of feed rather than a deposit. Self employment taxes The prepayment has a business purpose and is not merely for tax avoidance. Self employment taxes Deducting the prepayment does not result in a material distortion of your income. Self employment taxes If you meet all three tests, you can deduct the prepaid feed, subject to the limit on prepaid farm supplies discussed earlier. Self employment taxes If you fail any of these tests, you can deduct the prepaid feed only in the year it is consumed. Self employment taxes This rule does not apply to the purchase of commodity futures contracts. Self employment taxes Payment for the purchase of feed. Self employment taxes Whether a payment is for the purchase of feed or a deposit depends on the facts and circumstances in each case. Self employment taxes It is for the purchase of feed if you can show you made it under a binding commitment to accept delivery of a specific quantity of feed at a fixed price and you are not entitled, by contract or business custom, to a refund or repurchase. Self employment taxes The following are some factors that show a payment is a deposit rather than for the purchase of feed. Self employment taxes The absence of specific quantity terms. Self employment taxes The right to a refund of any unapplied payment credit at the end of the contract. Self employment taxes The seller's treatment of the payment as a deposit. Self employment taxes The right to substitute other goods or products for those specified in the contract. Self employment taxes A provision permitting substitution of ingredients to vary the particular feed mix to meet your livestock's current diet requirements will not suggest a deposit. Self employment taxes Further, a price adjustment to reflect market value at the date of delivery is not, by itself, proof of a deposit. Self employment taxes Business purpose. Self employment taxes The prepayment has a business purpose only if you have a reasonable expectation of receiving some business benefit from prepaying the cost of livestock feed. Self employment taxes The following are some examples of business benefits. Self employment taxes Fixing maximum prices and securing an assured feed supply. Self employment taxes Securing preferential treatment in anticipation of a feed shortage. Self employment taxes Other factors considered in determining the existence of a business purpose are whether the prepayment was a condition imposed by the seller and whether that condition was meaningful. Self employment taxes No material distortion of income. Self employment taxes The following are some factors considered in determining whether deducting prepaid livestock feed materially distorts income. Self employment taxes Your customary business practice in conducting your livestock operations. Self employment taxes The expense in relation to past purchases. Self employment taxes The time of year you made the purchase. Self employment taxes The expense in relation to your income for the year. Self employment taxes Labor Hired You can deduct reasonable wages paid for regular farm labor, piecework, contract labor, and other forms of labor hired to perform your farming operations. Self employment taxes You can pay wages in cash or in noncash items such as inventory, capital assets, or assets used in your business. Self employment taxes The cost of boarding farm labor is a deductible labor cost. Self employment taxes Other deductible costs you incur for farm labor include health insurance, workers' compensation insurance, and other benefits. Self employment taxes If you must withhold social security, Medicare, and income taxes from your employees' cash wages, you can still deduct the full amount of wages before withholding. Self employment taxes See chapter 13 for more information on employment taxes. Self employment taxes Also, deduct the employer's share of the social security and Medicare taxes you must pay on your employees' wages as a farm business expense on Schedule F, line 29. Self employment taxes See Taxes , later. Self employment taxes Property for services. Self employment taxes If you transfer property to an employee in payment for services, you can deduct as wages paid the fair market value of the property on the date of transfer. Self employment taxes If the employee pays you anything for the property, deduct as wages the fair market value of the property minus the payment by the employee for the property. Self employment taxes Treat the wages deducted as an amount received for the property. Self employment taxes You may have a gain or loss to report if the property's adjusted basis on the date of transfer is different from its fair market value. Self employment taxes Any gain or loss has the same character the exchanged property had in your hands. Self employment taxes For more information, see chapter 8. Self employment taxes Child as an employee. Self employment taxes You can deduct reasonable wages or other compensation you pay to your child for doing farmwork if a true employer-employee relationship exists between you and your child. Self employment taxes Include these wages in the child's income. Self employment taxes The child may have to file an income tax return. Self employment taxes These wages may also be subject to social security and Medicare taxes if your child is age 18 or older. Self employment taxes For more information, see Family Employees in chapter 13. Self employment taxes A Form W-2, Wage and Tax Statement, should be issued to the child employee. Self employment taxes The fact that your child spends the wages to buy clothes or other necessities you normally furnish does not prevent you from deducting your child's wages as a farm expense. Self employment taxes The amount of wages paid to the child could cause a loss of the dependency exemption depending on how the child uses the money. Self employment taxes Spouse as an employee. Self employment taxes You can deduct reasonable wages or other compensation you pay to your spouse if a true employer-employee relationship exists between you and your spouse. Self employment taxes Wages you pay to your spouse are subject to social security and Medicare taxes. Self employment taxes For more information, see Family Employees in chapter 13. Self employment taxes Nondeductible Pay You cannot deduct wages paid for certain household work, construction work, and maintenance of your home. Self employment taxes However, those wages may be subject to the employment taxes discussed in chapter 13. Self employment taxes Household workers. Self employment taxes Do not deduct amounts paid to persons engaged in household work, except to the extent their services are used in boarding or otherwise caring for farm laborers. Self employment taxes Construction labor. Self employment taxes Do not deduct wages paid to hired help for the construction of new buildings or other improvements. Self employment taxes These wages are part of the cost of the building or other improvement. Self employment taxes You must capitalize them. Self employment taxes Maintaining your home. Self employment taxes If your farm employee spends time maintaining or repairing your home, the wages and employment taxes you pay for that work are nondeductible personal expenses. Self employment taxes For example, assume you have a farm employee for the entire tax year and the employee spends 5% of the time maintaining your home. Self employment taxes The employee devotes the remaining time to work on your farm. Self employment taxes You cannot deduct 5% of the wages and employment taxes you pay for that employee. Self employment taxes Employment Credits Reduce your deduction for wages by the amount of any employment credits you claim such as the work opportunity credit for qualified tax-exempt organizations hiring qualified veterans (Form 5884-C). Self employment taxes Repairs and Maintenance You can deduct most expenses for the repair and maintenance of your farm property. Self employment taxes Common items of repair and maintenance are repainting, replacing shingles and supports on farm buildings, and periodic or routine maintenance of trucks, tractors, and other farm machinery. Self employment taxes However, repairs to, or overhauls of, depreciable property that substantially prolong the life of the property, increase its value, or adapt it to a different use are capital expenses. Self employment taxes For example, if you repair the barn roof, the cost is deductible. Self employment taxes But if you replace the roof, it is a capital expense. Self employment taxes For more information, see Capital Expenses , later. Self employment taxes Interest You can deduct as a farm business expense interest paid on farm mortgages and other obligations you incur in your farm business. Self employment taxes Cash method. Self employment taxes If you use the cash method of accounting, you can generally deduct interest paid during the tax year. Self employment taxes You cannot deduct interest paid with funds received from the original lender through another loan, advance, or other arrangement similar to a loan. Self employment taxes You can, however, deduct the interest when you start making payments on the new loan. Self employment taxes For more information, see Cash Method in chapter 2. Self employment taxes Prepaid interest. Self employment taxes Under the cash method, you generally cannot deduct any interest paid before the year it is due. Self employment taxes Interest paid in advance may be deducted only in the tax year in which it is due. Self employment taxes Accrual method. Self employment taxes If you use an accrual method of accounting, you can deduct only interest that has accrued during the tax year. Self employment taxes However, you cannot deduct interest owed to a related person who uses the cash method until payment is made and the interest is includible in the gross income of that person. Self employment taxes For more information, see Accrual Method in chapter 2. Self employment taxes Allocation of interest. Self employment taxes If you use the proceeds of a loan for more than one purpose, you must allocate the interest on that loan to each use. Self employment taxes Allocate the interest to the following categories. Self employment taxes Trade or business interest. Self employment taxes Passive activity interest. Self employment taxes Investment interest. Self employment taxes Portfolio interest. Self employment taxes Personal interest. Self employment taxes You generally allocate interest on a loan the same way you allocate the loan proceeds. Self employment taxes You allocate loan proceeds by tracing disbursements to specific uses. Self employment taxes The easiest way to trace disbursements to specific uses is to keep the proceeds of a particular loan separate from any other funds. Self employment taxes Secured loan. Self employment taxes The allocation of loan proceeds and the related interest is generally not affected by the use of property that secures the loan. Self employment taxes Example. Self employment taxes You secure a loan with property used in your farming business. Self employment taxes You use the loan proceeds to buy a car for personal use. Self employment taxes You must allocate interest expense on the loan to personal use (purchase of the car) even though the loan is secured by farm business property. Self employment taxes If the property that secures the loan is your home, you generally do not allocate the loan proceeds or the related interest. Self employment taxes The interest is usually deductible as qualified home mortgage interest, regardless of how the loan proceeds are used. Self employment taxes However, you can choose to treat the loan as not secured by your home. Self employment taxes For more information, see Publication 936. Self employment taxes Allocation period. Self employment taxes The period for which a loan is allocated to a particular use begins on the date the proceeds are used and ends on the earlier of the following dates. Self employment taxes The date the loan is repaid. Self employment taxes The date the loan is reallocated to another use. Self employment taxes More information. Self employment taxes For more information on interest, see chapter 4 in Publication 535. Self employment taxes Breeding Fees You can deduct breeding fees as a farm business expense. Self employment taxes However, if you use an accrual method of accounting, you must capitalize breeding fees and allocate them to the cost basis of the calf, foal, etc. Self employment taxes For more information on who must use an accrual method of accounting, see Accrual Method Required under Accounting Methods in chapter 2. Self employment taxes Fertilizer and Lime You can deduct in the year paid or incurred the cost of fertilizer, lime, and other materials applied to farmland to enrich, neutralize, or condition it if the benefits last a year or less. Self employment taxes You can also deduct the cost of applying these materials in the year you pay or incur it. Self employment taxes However, see Prepaid Farm Supplies , earlier, for a rule that may limit your deduction for these materials. Self employment taxes If the benefits of the fertilizer, lime, or other materials last substantially more than one year, you generally capitalize their cost and deduct a part each year the benefits last. Self employment taxes However, you can choose to deduct these expenses in the year paid or incurred. Self employment taxes If you make this choice, you will need IRS approval if you later decide to capitalize the cost of previously deducted items. Self employment taxes If you sell farmland on which fertilizer or lime has been applied and if the selling price of the land includes part or all of the cost of the fertilizer or lime, you report the sale amount attributable to the fertilizer or lime as ordinary income. Self employment taxes Farmland, for these purposes, is land used for producing crops, fruits, or other agricultural products or for sustaining livestock. Self employment taxes It does not include land you have never used previously for producing crops or sustaining livestock. Self employment taxes You cannot deduct initial land preparation costs. Self employment taxes (See Capital Expenses , later. Self employment taxes ) Include government payments you receive for lime or fertilizer in income. Self employment taxes See Fertilizer and Lime under Agricultural Program Payments in chapter 3. Self employment taxes Taxes You can deduct as a farm business expense the real estate and personal property taxes on farm business assets, such as farm equipment, animals, farmland, and farm buildings. Self employment taxes You also can deduct the social security and Medicare taxes you pay to match the amount withheld from the wages of farm employees and any federal unemployment tax you pay. Self employment taxes For information on employment taxes, see chapter 13. Self employment taxes Allocation of taxes. Self employment taxes The taxes on the part of your farm you use as your home (including the furnishings and surrounding land not used for farming) are nonbusiness taxes. Self employment taxes You may be able to deduct these nonbusiness taxes as itemized deductions on Schedule A (Form 1040). Self employment taxes To determine the nonbusiness part, allocate the taxes between the farm assets and nonbusiness assets. Self employment taxes The allocation can be done from the assessed valuations. Self employment taxes If your tax statement does not show the assessed valuations, you can usually get them from the tax assessor. Self employment taxes State and local general sales taxes. Self employment taxes State and local general sales taxes on nondepreciable farm business expense items are deductible as part of the cost of those items. Self employment taxes Include state and local general sales taxes imposed on the purchase of assets for use in your farm business as part of the cost you depreciate. Self employment taxes Also treat the taxes as part of your cost if they are imposed on the seller and passed on to you. Self employment taxes State and federal income taxes. Self employment taxes Individuals cannot deduct state and federal income taxes as farm business expenses. Self employment taxes Individuals can deduct state and local income taxes only as an itemized deduction on Schedule A (Form 1040). Self employment taxes However, you cannot deduct federal income tax. Self employment taxes Highway use tax. Self employment taxes You can deduct the federal use tax on highway motor vehicles paid on a truck or truck tractor used in your farm business. Self employment taxes For information on the tax itself, including information on vehicles subject to the tax, see the Instructions for Form 2290, Heavy Highway Vehicle Use Tax Return. Self employment taxes Self-employment tax deduction. Self employment taxes You can deduct as an adjustment to income on Form 1040 one-half of your self-employment tax in figuring your adjusted gross income. Self employment taxes For more information, see chapter 12. Self employment taxes Insurance You generally can deduct the ordinary and necessary cost of insurance for your farm business as a business expense. Self employment taxes This includes premiums you pay for the following types of insurance. Self employment taxes Fire, storm, crop, theft, liability, and other insurance on farm business assets. Self employment taxes Health and accident insurance on your farm employees. Self employment taxes Workers' compensation insurance set by state law that covers any claims for job-related bodily injuries or diseases suffered by employees on your farm, regardless of fault. Self employment taxes Business interruption insurance. Self employment taxes State unemployment insurance on your farm employees (deductible as taxes if they are considered taxes under state law). Self employment taxes Insurance to secure a loan. Self employment taxes If you take out a policy on your life or on the life of another person with a financial interest in your farm business to get or protect a business loan, you cannot deduct the premiums as a business expense. Self employment taxes In the event of death, the proceeds of the policy are not taxed as income even if they are used to liquidate the debt. Self employment taxes Advance premiums. Self employment taxes Deduct advance payments of insurance premiums only in the year to which they apply, regardless of your accounting method. Self employment taxes Example. Self employment taxes On June 28, 2013, you paid a premium of $3,000 for fire insurance on your barn. Self employment taxes The policy will cover a period of 3 years beginning on July 1, 2013. Self employment taxes Only the cost for the 6 months in 2013 is deductible as an insurance expense on your 2013 calendar year tax return. Self employment taxes Deduct $500, which is the premium for 6 months of the 36-month premium period, or 6/36 of $3,000. Self employment taxes In both 2014 and 2015, deduct $1,000 (12/36 of $3,000). Self employment taxes Deduct the remaining $500 in 2016. Self employment taxes Had the policy been effective on January 1, 2013, the deductible expense would have been $1,000 for each of the years 2013, 2014, and 2015, based on one-third of the premium used each year. Self employment taxes Business interruption insurance. Self employment taxes Use and occupancy and business interruption insurance premiums are deductible as a business expense. Self employment taxes This insurance pays for lost profits if your business is shut down due to a fire or other cause. Self employment taxes Report any proceeds in full on Schedule F, Part I. Self employment taxes Self-employed health insurance deduction. Self employment taxes If you are self-employed, you can deduct as an adjustment to income on Form 1040 your payments for medical, dental, and qualified long-term care insurance coverage for yourself, your spouse, and your dependents when figuring your adjusted gross income on your Form 1040. Self employment taxes Effective March 30, 2010, the insurance can also cover any child of yours under age 27 at the end of 2013, even if the child was not your dependent. Self employment taxes Generally, this deduction cannot be more than the net profit from the business under which the plan was established. Self employment taxes If you or your spouse is also an employee of another person, you cannot take the deduction for any month in which you are eligible to participate in a subsidized health plan maintained by your employer or your spouse's employer. Self employment taxes Generally, use the Self-Employed Health Insurance Deduction Worksheet in the Instructions for Form 1040 to figure your deduction. Self employment taxes Include the remaining part of the insurance payment in your medical expenses on Schedule A (Form 1040) if you itemize your deductions. Self employment taxes For more information, see Deductible Premiums in Publication 535, chapter 6. Self employment taxes Rent and Leasing If you lease property for use in your farm business, you can generally deduct the rent you pay on Schedule F. Self employment taxes However, you cannot deduct rent you pay in crop shares if you deduct the cost of raising the crops as farm expenses. Self employment taxes Advance payments. Self employment taxes Deduct advance payments of rent only in the year to which they apply, regardless of your accounting method. Self employment taxes Farm home. Self employment taxes If you rent a farm, do not deduct the part of the rental expense that represents the fair rental value of the farm home in which you live. Self employment taxes Lease or Purchase If you lease a farm building or equipment, you must determine whether or not the agreement must be treated as a conditional sales contract rather than a lease. Self employment taxes If the agreement is treated as a conditional sales contract, the payments under the agreement (so far as they do not represent interest or other charges) are payments for the purchase of the property. Self employment taxes Do not deduct these payments as rent, but capitalize the cost of the property and recover this cost through depreciation. Self employment taxes Conditional sales contract. Self employment taxes Whether an agreement is a conditional sales contract depends on the intent of the parties. Self employment taxes Determine intent based on the provisions of the agreement and the facts and circumstances that exist when you make the agreement. Self employment taxes No single test, or special combination of tests, always applies. Self employment taxes However, in general, an agreement may be considered a conditional sales contract rather than a lease if any of the following is true. Self employment taxes The agreement applies part of each payment toward an equity interest you will receive. Self employment taxes You get title to the property after you make a stated amount of required payments. Self employment taxes The amount you must pay to use the property for a short time is a large part of the amount you would pay to get title to the property. Self employment taxes You pay much more than the current fair rental value of the property. Self employment taxes You have an option to buy the property at a nominal price compared to the value of the property when you may exercise the option. Self employment taxes Determine this value when you make the agreement. Self employment taxes You have an option to buy the property at a nominal price compared to the total amount you have to pay under the agreement. Self employment taxes The agreement designates part of the payments as interest, or part of the payments can be easily recognized as interest. Self employment taxes Example. Self employment taxes You lease new farm equipment from a dealer who both sells and leases. Self employment taxes The agreement includes an option to purchase the equipment for a specified price. Self employment taxes The lease payments and the specified option price equal the sales price of the equipment plus interest. Self employment taxes Under the agreement, you are responsible for maintenance, repairs, and the risk of loss. Self employment taxes For federal income tax purposes, the agreement is a conditional sales contract. Self employment taxes You cannot deduct any of the lease payments as rent. Self employment taxes You can deduct interest, repairs, insurance, depreciation, and other expenses related to the equipment. Self employment taxes Motor vehicle leases. Self employment taxes Special rules apply to lease agreements that have a terminal rental adjustment clause. Self employment taxes In general, this is a clause that provides for a rental price adjustment based on the amount the lessor is able to sell the vehicle for at the end of the lease. Self employment taxes If your rental agreement contains a terminal rental adjustment clause, treat the agreement as a lease if the agreement otherwise qualifies as a lease. Self employment taxes For more information, see Internal Revenue Code (IRC) section 7701(h). Self employment taxes Leveraged leases. Self employment taxes Special rules apply to leveraged leases of equipment (arrangements in which the equipment is financed by a nonrecourse loan from a third party). Self employment taxes For more information, see Publication 535, chapter 3, and Revenue Procedure 2001-28, which begins on page 1156 of Internal Revenue Bulletin 2001-19 at www. Self employment taxes irs. Self employment taxes gov/pub/irs-irbs/irb01-19. Self employment taxes pdf. Self employment taxes Depreciation If property you acquire to use in your farm business is expected to last more than one year, you generally cannot deduct the entire cost in the year you acquire it. Self employment taxes You must recover the cost over more than one year and deduct part of it each year on Schedule F as depreciation or amortization. Self employment taxes However, you can choose to deduct part or all of the cost of certain qualifying property, up to a limit, as a section 179 deduction in the year you place it in service. Self employment taxes Depreciation, amortization, and the section 179 deduction are discussed in chapter 7. Self employment taxes Business Use of Your Home You can deduct expenses for the business use of your home if you use part of your home exclusively and regularly: As the principal place of business for any trade or business in which you engage, As a place to meet or deal with patients, clients, or customers in the normal course of your trade or business, or In connection with your trade or business, if you are using a separate structure that is not attached to your home. Self employment taxes Your home office will qualify as your principal place of business for deducting expenses for its use if you meet both of the following requirements. Self employment taxes You use it exclusively and regularly for the administrative or management activities of your trade or business. Self employment taxes You have no other fixed location where you conduct substantial administrative or management activities of your trade or business. Self employment taxes If you use part of your home for business, you must divide the expenses of operating your home between personal and business use. Self employment taxes The IRS now provides a simplified method to determine your expenses for business use of your home. Self employment taxes For more information, see Schedule C (Form 1040), Part II, and its instructions. Self employment taxes Deduction limit. Self employment taxes If your gross income from farming equals or exceeds your total farm expenses (including expenses for the business use of your home), you can deduct all your farm expenses. Self employment taxes But if your gross income from farming is less than your total farm expenses, your deduction for certain expenses for the use of your home in your farming business is limited. Self employment taxes Your deduction for otherwise nondeductible expenses, such as utilities, insurance, and depreciation (with depreciation taken last), cannot be more than the gross income from farming minus the following expenses. Self employment taxes The business part of expenses you could deduct even if you did not use your home for business (such as deductible mortgage interest, real estate taxes, and casualty and theft losses). Self employment taxes Farm expenses other than expenses that relate to the use of your home. Self employment taxes If you are self-employed, do not include your deduction for half of your self-employment tax. Self employment taxes Deductions over the current year's limit can be carried over to your next tax year. Self employment taxes They are subject to the deduction limit for the next tax year. Self employment taxes More information. Self employment taxes See Publication 587 for more information on deducting expenses for the business use of your home. Self employment taxes Telephone expense. Self employment taxes You cannot deduct the cost of basic local telephone service (including any taxes) for the first telephone line you have in your home, even if you have an office in your home. Self employment taxes However, charges for business long-distance phone calls on that line, as well as the cost of a second line into your home used exclusively for your farm business, are deductible business expenses. Self employment taxes Cell phone charges for calls relating to your farm business are deductible. Self employment taxes If the cell phone you use for your farm business is part of a family cell phone plan, you must allocate and deduct only the portion of the charges attributable to farm business calls. Self employment taxes Truck and Car Expenses You can deduct the actual cost of operating a truck or car in your farm business. Self employment taxes Only expenses for business use are deductible. Self employment taxes These include such items as gasoline, oil, repairs, license tags, insurance, and depreciation (subject to certain limits). Self employment taxes Standard mileage rate. Self employment taxes Instead of using actual costs, under certain conditions you can use the standard mileage rate. Self employment taxes The standard mileage rate for each mile of business use is 56. Self employment taxes 5 cents in 2013. Self employment taxes You can use the standard mileage rate for a car or a light truck, such as a van, pickup, or panel truck, you own or lease. Self employment taxes You cannot use the standard mileage rate if you operate five or more cars or light trucks at the same time. Self employment taxes You are not using five or more vehicles at the same time if you alternate using the vehicles (you use them at different times) for business. Self employment taxes Example. Self employment taxes Maureen owns a car and four pickup trucks that are used in her farm business. Self employment taxes Her farm employees use the trucks and she uses the car for business. Self employment taxes Maureen cannot use the standard mileage rate for the car or the trucks. Self employment taxes This is because all five vehicles are used in Maureen's farm business at the same time. Self employment taxes She must use actual expenses for all vehicles. Self employment taxes Business use percentage. Self employment taxes You can claim 75% of the use of a car or light truck as business use without any records if you used the vehicle during most of the normal business day directly in connection with the business of farming. Self employment taxes You choose this method of substantiating business use the first year the vehicle is placed in service. Self employment taxes Once you make this choice, you may not change to another method later. Self employment taxes The following are uses directly connected with the business of farming. Self employment taxes Cultivating land. Self employment taxes Raising or harvesting any agricultural or horticultural commodity. Self employment taxes Raising, shearing, feeding, caring for, training, and managing animals. Self employment taxes Driving to the feed or supply store. Self employment taxes If you keep records and they show that your business use was more than 75%, you may be able to claim more. Self employment taxes See Recordkeeping requirements under Travel Expenses , below. Self employment taxes More information. Self employment taxes For more information on deductible truck and car expenses, see Publication 463, chapter 4. Self employment taxes If you pay your employees for the use of their truck or car in your farm business, see Reimbursements to employees under Travel Expenses next. Self employment taxes Travel Expenses You can deduct ordinary and necessary expenses you incur while traveling away from home for your farm business. Self employment taxes You cannot deduct lavish or extravagant expenses. Self employment taxes Usually, the location of your farm business is considered your home for tax purposes. Self employment taxes You are traveling away from home if: Your duties require you to be absent from your farm substantially longer than an ordinary work day, and You need to get sleep or rest to meet the demands of your work while away from home. Self employment taxes If you meet these requirements and can prove the time, place, and business purpose of your travel, you can deduct your ordinary and necessary travel expenses. Self employment taxes The following are some types of deductible travel expenses. Self employment taxes Air, rail, bus, and car transportation; Meals and lodging; Dry cleaning and laundry; Telephone and fax; Transportation between your hotel and your temporary work or business meeting location; and Tips for any of the above expenses. Self employment taxes Meals. Self employment taxes You ordinarily can deduct only 50% of your business-related meals expenses. Self employment taxes You can deduct the cost of your meals while traveling on business only if your business trip is overnight or long enough to require you to stop for sleep or rest to properly perform your duties. Self employment taxes You cannot deduct any of the cost of meals if it is not necessary for you to rest, unless you meet the rules for business entertainment. Self employment taxes For information on entertainment expenses, see Publication 463, chapter 2. Self employment taxes The expense of a meal includes amounts you spend for your food, beverages, taxes, and tips relating to the meal. Self employment taxes You can deduct either 50% of the actual cost or 50% of a standard meal allowance that covers your daily meal and incidental expenses. Self employment taxes Recordkeeping requirements. Self employment taxes You must be able to prove your deductions for travel by adequate records or other evidence that will support your own statement. Self employment taxes Estimates or approximations do not qualify as proof of an expense. Self employment taxes You should keep an account book or similar record, supported by adequate documentary evidence, such as receipts, that together support each element of an expense. Self employment taxes Generally, it is best to record the expense and get documentation of it at the time you pay it. Self employment taxes If you choose to deduct a standard meal allowance rather than the actual expense, you do not have to keep records to prove amounts spent for meals and incidental items. Self employment taxes However, you must still keep records to prove the actual amount of other travel expenses, and the time, place, and business purpose of your travel. Self employment taxes More information. Self employment taxes For detailed information on travel, recordkeeping, and the standard meal allowance, see Publication 463. Self employment taxes Reimbursements to employees. Self employment taxes You generally can deduct reimbursements you pay to your employees for travel and transportation expenses they incur in the conduct of your business. Self employment taxes Employees may be reimbursed under an accountable or nonaccountable plan. Self employment taxes Under an accountable plan, the employee must provide evidence of expenses. Self employment taxes Under a nonaccountable plan, no evidence of expenses is required. Self employment taxes If you reimburse expenses under an accountable plan, deduct them as travel and transportation expenses. Self employment taxes If you reimburse expenses under a nonaccountable plan, you must report the reimbursements as wages on Form W-2 and deduct them as wages. Self employment taxes For more information, see Publication 535, chapter 11. Self employment taxes Marketing Quota Penalties You can deduct as Other expenses on Schedule F penalties you pay for marketing crops in excess of farm marketing quotas. Self employment taxes However, if you do not pay the penalty, but instead the purchaser of your crop deducts it from the payment to you, include in gross income only the amount you received. Self employment taxes Do not take a separate deduction for the penalty. Self employment taxes Tenant House Expenses You can deduct the costs of maintaining houses and their furnishings for tenants or hired help as farm business expenses. Self employment taxes These costs include repairs, utilities, insurance, and depreciation. Self employment taxes The value of a dwelling you furnish to a tenant under the usual tenant-farmer arrangement is not taxable income to the tenant. Self employment taxes Items Purchased for Resale If you use the cash method of accounting, you ordinarily deduct the cost of livestock and other items purchased for resale only in the year of sale. Self employment taxes You deduct this cost, including freight charges for transporting the livestock to the farm, on Schedule F, Part I. Self employment taxes However, see Chickens, seeds, and young plants , below. Self employment taxes Example. Self employment taxes You use the cash method of accounting. Self employment taxes In 2013, you buy 50 steers you will sell in 2014. Self employment taxes You cannot deduct the cost of the steers on your 2013 tax return. Self employment taxes You deduct their cost on your 2014 Schedule F, Part I. Self employment taxes Chickens, seeds, and young plants. Self employment taxes If you are a cash method farmer, you can deduct the cost of hens and baby chicks bought for commercial egg production, or for raising and resale, as an expense on Schedule F, Part I, in the year paid if you do it consistently and it does not distort income. Self employment taxes You also can deduct the cost of seeds and young plants bought for further development and cultivation before sale as an expense on Schedule F, Part I, when paid if you do this consistently and you do not figure your income on the crop method. Self employment taxes However, see Prepaid Farm Supplies , earlier, for a rule that may limit your deduction for these items. Self employment taxes If you deduct the cost of chickens, seeds, and young plants as an expense, report their entire selling price as income. Self employment taxes You cannot also deduct the cost from the selling price. Self employment taxes You cannot deduct the cost of seeds and young plants for Christmas trees and timber as an expense. Self employment taxes Deduct the cost of these seeds and plants through depletion allowances. Self employment taxes For more information, see Depletion in chapter 7. Self employment taxes The cost of chickens and plants used as food for your family is never deductible. Self employment taxes Capitalize the cost of plants with a preproductive period of more than 2 years, unless you can elect out of the uniform capitalization rules. Self employment taxes These rules are discussed in chapter 6. Self employment taxes Example. Self employment taxes You use the cash method of accounting. Self employment taxes In 2013, you buy 500 baby chicks to raise for resale in 2014. Self employment taxes You also buy 50 bushels of winter wheat seed in 2013 that you sow in the fall. Self employment taxes Unless you previously adopted the method of deducting these costs in the year you sell the chickens or the harvested crops, you can deduct the cost of both the baby chicks and the seed wheat in 2013. Self employment taxes Election to use crop method. Self employment taxes If you use the crop method, you can delay deducting the cost of seeds and young plants until you sell them. Self employment taxes You must get IRS approval to use the crop method. Self employment taxes If you follow this method, deduct the cost from the selling price to determine your profit on Schedule F, Part I. Self employment taxes For more information, see Crop method under Special Methods of Accounting in chapter 2. Self employment taxes Choosing a method. Self employment taxes You can adopt either the crop method or the cash method for deducting the cost in the first year you buy egg-laying hens, pullets, chicks, or seeds and young plants. Self employment taxes Although you must use the same method for egg-laying hens, pullets, and chicks, you can use a different method for seeds and young plants. Self employment taxes Once you use a particular method for any of these items, use it for those items until you get IRS approval to change your method. Self employment taxes For more information, see Change in Accounting Method in chapter 2. Self employment taxes Other Expenses The following list, while not all-inclusive, shows some expenses you can deduct as other farm expenses on Schedule F, Part II. Self employment taxes These expenses must be for business purposes and (1) paid, if you use the cash method of accounting, or (2) incurred, if you use an accrual method of accounting. Self employment taxes Accounting fees. Self employment taxes Advertising. Self employment taxes Business travel and meals. Self employment taxes Commissions. Self employment taxes Consultant fees. Self employment taxes Crop scouting expenses. Self employment taxes Dues to cooperatives. Self employment taxes Educational expenses (to maintain and improve farming skills). Self employment taxes Farm-related attorney fees. Self employment taxes Farm magazines. Self employment taxes Ginning. Self employment taxes Insect sprays and dusts. Self employment taxes Litter and bedding. Self employment taxes Livestock fees. Self employment taxes Marketing fees. Self employment taxes Milk assessment. Self employment taxes Recordkeeping expenses. Self employment taxes Service charges. Self employment taxes Small tools expected to last one year or less. Self employment taxes Stamps and stationery. Self employment taxes Subscriptions to professional, technical, and trade journals that deal with farming. Self employment taxes Tying material and containers. Self employment taxes Loan expenses. Self employment taxes You prorate and deduct loan expenses, such as legal fees and commissions, you pay to get a farm loan over the term of the loan. Self employment taxes Tax preparation fees. Self employment taxes You can deduct as a farm business expense on Schedule F the cost of preparing that part of your tax return relating to your farm business. Self employment taxes You may be able to deduct the remaining cost on Schedule A (Form 1040) if you itemize your deductions. Self employment taxes You also can deduct on Schedule F the amount you pay or incur in resolving tax issues relating to your farm business. Self employment taxes Domestic Production Activities Deduction Generally, you are allowed a deduction for income attributable to domestic production activities. Self employment taxes You can deduct 9% of the lesser of your qualified production activities income or your taxable income (adjusted gross income for individuals) for the tax year. Self employment taxes Your deduction is limited to 50% of the Form W-2 wages you paid for the tax year that are properly allocable to domestic production gross receipts. Self employment taxes For this purpose, Form W-2 wages do not include noncash wages paid for agricultural labor, such as compensation paid as commodities. Self employment taxes Also, excluded from Form W-2 wages are wages paid to your children under age 18 and nontaxable fringe benefits. Self employment taxes Income from cooperatives. Self employment taxes If you receive a patronage dividend or qualified per-unit retain allocation from a cooperative which is engaged in the manufacturing, production, growth, or extraction in whole or in significant part of any agricultural or horticultural product or in the marketing of agricultural or horticultural products, your income from the cooperative can give rise to a domestic production activities deduction. Self employment taxes This deduction amount is reported on Form 1099-PATR, box 6. Self employment taxes In order for you to qualify for the deduction, the cooperative is required to send you a written notice designating your portion of the domestic production activities deduction. Self employment taxes More information. Self employment taxes For more information on the domestic production activities deduction, see the Instructions for Form 8903. Self employment taxes Capital Expenses A capital expense is a payment, or a debt incurred, for the acquisition, improvement, or restoration of an asset that is expected to last more than one year. Self employment taxes You include the expense in the basis of the asset. Self employment taxes Uniform capitalization rules also require you to capitalize or include in inventory certain other expenses. Self employment taxes See chapters 2 and 6. Self employment taxes Capital expenses are generally not deductible, but they may be depreciable. Self employment taxes However, you can elect to deduct certain capital expenses, such as the following. Self employment taxes The cost of fertilizer, lime, etc. Self employment taxes (See Fertilizer and Lime under Deductible Expenses , earlier. Self employment taxes ) Soil and water conservation expenses. Self employment taxes (See chapter 5. Self employment taxes ) The cost of property that qualifies for a deduction under section 179. Self employment taxes (See chapter 7. Self employment taxes ) Business start-up costs. Self employment taxes (See Business start-up and organizational costs , later. Self employment taxes ) Forestation and reforestation costs. Self employment taxes (See Forestation and reforestation costs , later. Self employment taxes ) Generally, the costs of the following items, including the costs of material, hired labor, and installation, are capital expenses. Self employment taxes Land and buildings. Self employment taxes Additions, alterations, and improvements to buildings, etc. Self employment taxes Cars and trucks. Self employment taxes Equipment and machinery. Self employment taxes Fences. Self employment taxes Draft, breeding, sport, and dairy livestock. Self employment taxes Repairs to machinery, equipment, trucks, and cars that prolong their useful life, increase their value, or adapt them to different use. Self employment taxes Water wells, including drilling and equipping costs. Self employment taxes Land preparation costs, such as: Clearing land for farming, Leveling and conditioning land, Purchasing and planting trees, Building irrigation canals and ditches, Laying irrigation pipes, Installing drain tile, Modifying channels or streams, Constructing earthen, masonry, or concrete tanks, reservoirs, or dams, and Building roads. Self employment taxes Business start-up and organizational costs. Self employment taxes You can elect to deduct up to $5,000 of business start-up costs and $5,000 of organizational costs paid or incurred after October 22, 2004. Self employment taxes The $5,000 deduction is reduced by the amount your total start-up or organizational costs exceed $50,000. Self employment taxes Any remaining costs must be amortized. Self employment taxes See chapter 7. Self employment taxes You elect to deduct start-up or organizational costs by claiming the deduction on the income tax return filed by the due date (including extensions) for the tax year in which the active trade or business begins. Self employment taxes However, if you timely filed your return for the year without making the election, you can still make the election by filing an amended return within 6 months of the due date of the return (excluding extensions). Self employment taxes Clearly indicate the election on your amended return and write “Filed pursuant to section 301. Self employment taxes 9100-2” at the top of the amended return. Self employment taxes File the amended return at the same address you filed the original return. Self employment taxes The election applies when figuring taxable income for the current tax year and all subsequent years. Self employment taxes You can choose to forgo the election by clearly electing to capitalize your start-up or organizational costs on an income tax return filed by the due date (including extensions) for the tax year in which the active trade or business begins. Self employment taxes For more information about start-up and organizational costs, see chapter 7. Self employment taxes Crop production expenses. Self employment taxes The uniform capitalization rules generally require you to capitalize expenses incurred in producing plants. Self employment taxes However, except for certain taxpayers required to use an accrual method of accounting, the capitalization rules do not apply to plants with a preproductive period of 2 years or less. Self employment taxes For more information, see Uniform Capitalization Rules in chapter 6. Self employment taxes Timber. Self employment taxes Capitalize the cost of acquiring timber. Self employment taxes Do not include the cost of land in the cost of the timber. Self employment taxes You must generally capitalize direct costs incurred in reforestation. Self employment taxes However, you can elect to deduct some forestation and reforestation costs. Self employment taxes See Forestation and reforestation costs next. Self employment taxes Reforestation costs include the following. Self employment taxes Site preparation costs, such as: Girdling, Applying herbicide, Baiting rodents, and Clearing and controlling brush. Self employment taxes The cost of seed or seedlings. Self employment taxes Labor and tool expenses. Self employment taxes Depreciation on equipment used in planting or seeding. Self employment taxes Costs incurred in replanting to replace lost seedlings. Self employment taxes You can choose to capitalize certain indirect reforestation costs. Self employment taxes These capitalized amounts are your basis for the timber. Self employment taxes Recover your basis when you sell the timber or take depletion allowances when you cut the timber. Self employment taxes See Depletion in chapter 7. Self employment taxes Forestation and reforestation costs. Self employment taxes You can elect to deduct up to $10,000 ($5,000 if married filing separately; $0 for a trust) of qualifying reforestation costs paid or incurred after October 22, 2004, for each qualified timber property. Self employment taxes Any remaining costs can be amortized over an 84-month period. Self employment taxes See chapter 7. Self employment taxes If you make an election to deduct or amortize qualifying reforestation costs, you should create and maintain separate timber accounts for each qualified timber property. Self employment taxes The accounts should include all reforestation treatments and the dates they were applied. Self employment taxes Any qualified timber property that is subject to the deduction or amortization election cannot be included in any other timber account for which depletion is allowed. Self employment taxes The timber account should be maintained until the timber is disposed of. Self employment taxes For more information, see Notice 2006-47, 2006-20 I. Self employment taxes R. Self employment taxes B. Self employment taxes 892, available at www. Self employment taxes irs. Self employment taxes gov/irb/2006-20_IRB/ar11. Self employment taxes html. Self employment taxes You elect to deduct forestation and reforestation costs by claiming the deduction on the income tax return filed by the due date (including extensions) for the tax year in which the expenses were paid or incurred. Self employment taxes If you are filing Form T (Timber), Forest Activities Schedule, also complete Form T (Timber), Part IV. Self employment taxes If you are not filing Form T (Timber), attach a statement to your return with the following information. Self employment taxes The unique stand identification numbers. Self employment taxes The total number of acres reforested during the tax year. Self employment taxes The nature of the reforestation treatments. Self employment taxes The total amounts of the qualified reforestation expenditures eligible to be amortized or deducted. Self employment taxes However, if you timely filed your return for the year without making the election, you can still make the election by filing an amended return within 6 months of the due date of the return (excluding extensions). Self employment taxes Clearly indicate the election on your amended return and write “Filed pursuant to section 301. Self employment taxes 9100-2” at the top of the amended return. Self employment taxes File the amended return at the same address you filed the original return. Self employment taxes For more information about forestation and reforestation costs, see chapter 7. Self employment taxes For more information about timber, see Agriculture Handbook Number 731, Forest Landowners' Guide to the Federal Income Tax. Self employment taxes You can view this publication on the Internet at www. Self employment taxes fs. Self employment taxes fed. Self employment taxes us/publications. Self employment taxes Christmas tree cultivation. Self employment taxes If you are in the business of planting and cultivating Christmas trees to sell when they are more than 6 years old, capitalize expenses incurred for planting and stump culture and add them to the basis of the standing trees. Self employment taxes Recover these expenses as part of your adjusted basis when you sell the standing trees or as depletion allowances when you cut the trees. Self employment taxes For more information, see Timber Depletion under Depletion in chapter 7. Self employment taxes You can deduct as business expenses the costs incurred for shearing and basal pruning of these trees. Self employment taxes Expenses incurred for silvicultural practices, such as weeding or cleaning, and noncommercial thinning are also deductible as business expenses. Self employment taxes Capitalize the cost of land improvements, such as road grading, ditching, and fire breaks, that have a useful life beyond the tax year. Self employment taxes If the improvements do not have a determinable useful life, add their cost to the basis of the land. Self employment taxes The cost is recovered when you sell or otherwise dispose of it. Self employment taxes If the improvements have a determinable useful life, recover their cost through depreciation. Self employment taxes Capitalize the cost of equipment and other depreciable assets, such as culverts and fences, to the extent you do not use them in planting Christmas trees. Self employment taxes Recover these costs through depreciation. Self employment taxes Nondeductible Expenses You cannot deduct personal expenses and certain other items on your tax return even if they relate to your farm. Self employment taxes Personal, Living, and Family Expenses You cannot deduct certain personal, living, and family expenses as business expenses. Self employment taxes These include rent and insurance premiums paid on property used as your home, life insurance premiums on yourself or your family, the cost of maintaining cars, trucks, or horses for personal use, allowances to minor children, attorneys' fees and legal expenses incurred in personal matters, and household expenses. Self employment taxes Likewise, the cost of purchasing or raising produce or livestock consumed by you or your family is not deductible. Self employment taxes Other Nondeductible Items You cannot deduct the following items on your tax return. Self employment taxes Loss of growing plants, produce, and crops. Self employment taxes Losses of plants, produce, and crops raised for sale are generally not deductible. Self employment taxes However, you may have a deductible loss on plants with a preproductive period of more than 2 years. Self employment taxes See chapter 11 for more information. Self employment taxes Repayment of loans. Self employment taxes You cannot deduct the repayment of a loan. Self employment taxes However, if you use the proceeds of a loan for farm business expenses, you can deduct the interest on the loan. Self employment taxes See Interest , earlier. Self employment taxes Estate, inheritance, legacy, succession, and gift taxes. Self employment taxes You cannot deduct estate, inheritance, legacy, succession, and gift taxes. Self employment taxes Loss of livestock. Self employment taxes You cannot deduct as a loss the value of raised livestock that die if you deducted the cost of raising them as an expense. Self employment taxes Losses from sales or exchanges between related persons. Self employment taxes You cannot deduct losses from sales or exchanges of property between you and certain related persons, including your spouse, brother, sister, ancestor, or lineal descendant. Self employment taxes For more information, see chapter 2 of Publication 544, Sales and Other Dispositions of Assets. Self employment taxes Cost of raising unharvested crops. Self employment taxes You cannot deduct the cost of raising unharvested crops sold with land owned more than one year if you sell both at the same time and to the same person. Self employment taxes Add these costs to the basis of the land to determine the gain or loss on the sale. Self employment taxes For more information, see Section 1231 Gains and Losses in chapter 9. Self employment taxes Cost of unharvested crops bought with land. Self employment taxes Capitalize the purchase price of land, including the cost allocable to unharvested crops. Self employment taxes You cannot deduct the cost of the crops at the time of purchase. Self employment taxes However, you can deduct this cost in figuring net profit or loss in the tax year you sell the crops. Self employment taxes Cost related to gifts. Self employment taxes You cannot deduct costs related to your gifts of agricultural products or property held for sale in the ordinary course of your business. Self employment taxes The costs are not deductible in the year of the gift or any later year. Self employment taxes For example, you cannot deduct the cost of raising cattle or the cost of planting and raising unharvested wheat on parcels of land given as a gift to your children. Self employment taxes Club dues and membership fees. Self employment taxes Generally, you cannot deduct amounts you pay or incur for membership in any club organized for business, pleasure, recreation, or any other social purpose. Self employment taxes This includes country clubs, golf and athletic clubs, hotel clubs, sporting clubs, airline clubs, and clubs operated to provide meals under circumstances generally considered to be conducive to business discussions. Self employment taxes Exception. Self employment taxes The following organizations will not be treated as a club organized for business, pleasure, recreation, or other social purposes, unless one of its main purposes is to conduct entertainment activities for members or their guests or to provide members or their guests with access to entertainment facilities. Self employment taxes Boards of trade. Self employment taxes Business leagues. Self employment taxes Chambers of commerce. Self employment taxes Civic or public service organizations. Self employment taxes Professional associations. Self employment taxes Trade associations. Self employment taxes Real estate boards. Self employment taxes Fines and penalties. Self employment taxes You cannot deduct fines and penalties, except penalties for exceeding marketing quotas, discussed earlier. Self employment taxes Losses From Operating a Farm If your deductible farm expenses are more than your farm income, you have a loss from the operation of your farm. Self employment taxes The amount of the loss you can deduct when figuring your taxable income may be limited. Self employment taxes To figure your deductible loss, you must apply the following limits. Self employment taxes The at-risk limits. Self employment taxes The passive activity limits. Self employment taxes The following discussions explain these limits. Self employment taxes If your deductible loss after applying these limits is more than your other income for the year, you may have a net operating loss. Self employment taxes See Publication 536, Net Operating Losses (NOLs) for Individuals, Estates, and Trusts. Self employment taxes If you do not carry on your farming activity to make a profit, your loss deduction may be limited by the not-for-profit rules. Self employment taxes See Not-for-Profit Farming, later. Self employment taxes At-Risk Limits The at-risk rules limit your deduction for losses from most business or income-producing activities, including farming. Self employment taxes These rules limit the losses you can deduct when figuring your taxable income. Self employment taxes The deductible loss from an activity is limited to the amount you have at risk in the activity. Self employment taxes You are at risk in any activity for: The money and adjusted basis of property you contribute to the activity, and Amounts you borrow for use in the activity if: You are personally liable for repayment, or You pledge property (other than property used in the activity) as security for the loan. Self employment taxes You are not at risk, however, for amounts you borrow for use in a farming activity from a person who has an interest in the activity (other than as a creditor) or a person related to someone (other than you) having such an interest. Self employment taxes For more information, see Publication 925. Self employment taxes Passive Activity Limits A passive activity is generally any activity involving the conduct of any trade or business in which you do not materially participate. Self employment taxes Generally, a rental activity is a passive activity. Self employment taxes If you have a passive activity, special rules limit the loss you can deduct in the tax year. Self employment taxes You generally can deduct losses from passive activities only up to income from passive activities. Self employment taxes Credits are similarly limited. Self employment taxes For more information, see Publication 925. Self employment taxes Excess Farm Loss Limit For tax years beginning after 2009, excess farm losses (defined below) are not deductible if you received certain applicable subsidies. Self employment taxes This limit applies to any farming businesses, other than a C corporation, that received a direct or counter-cyclical payment (or any payment in lieu of such payments) under title I of the Food, Conservation, and Energy Act of 2008, or from a Commodity Credit Corporation loan. Self employment taxes Your farming losses are limited to the greater of: $300,000 ($150,000 for a married person filing a separate return), or The total net farm income for the prior five tax years. Self employment taxes Farming losses from casualty losses or losses by reason of disease or drought are disregarded for purposes of figuring this limitation. Self employment taxes Also, the limitation on farm losses should be applied before the passive activity loss rules are applied. Self employment taxes For more details, see IRC section 461(j). Self employment taxes Excess farm loss. Self employment taxes Generally, an excess farm loss is the amount of your farming loss that exceeds the amount of the limitation (as described above). Self employment taxes This loss can be determined by taking the excess of: The total deductions for the tax year from your farming businesses, over The total gross income or gain for the tax year from your farming businesses, plus the greater of: $300,000 ($150,000 for a married person filing a separate return), or The excess (if any) of the total gross income or gain from your farming businesses for the prior five tax years over the total deductions from your farming businesses for the prior five tax years. Self employment taxes Excess farm losses that are disallowed can be carried forward to the next tax year and treated as a deduction from that year. Self employment taxes Not-for-Profit Farming If you operate a farm for profit, you can deduct all the ordinary and necessary expenses of carrying on the business of farming on Schedule F. Self employment taxes However, if you do not carry on your farming activity, or other activity you engage or invest in, to make a profit, you report the income from the activity on Form 1040, line 21, and you can deduct expenses of carrying on the activity only if you itemize your deductions on Schedule A (Form 1040). Self employment taxes Also, there is a limit on the deductions you can take. Self employment taxes You cannot use a loss from that activity to offset income from other activities. Self employment taxes Activities you do as a hobby, or mainly for sport or recreation, come under this limit. Self employment taxes An investment activity intended only to produce tax losses for the investors also comes under this limit. Self employment taxes The limit on not-for-profit losses applies to individuals, partnerships, estates, trusts, and S corporations. Self employment taxes It does not apply to corporations other than S corporations. Self employment taxes In determining whether you are carrying on your farming activity for profit, all the facts are taken into account. Self employment taxes No one factor alone is decisive. Self employment taxes Among the factors to consider are whether: You operate your farm in a businesslike manner; The time and effort you spend on farming indicate you intend to make it profitable; You depend on income from farming for your livelihood; Your losses are due to circumstances beyond your control or are normal in the start-up phase of farming; You change your methods of operation in an attempt to improve profitability; You, or your advisors, have the knowledge needed to carry on the farming activity as a successful business; You were successful in making a profit in similar activities in the past; You make a profit from farming in some years and the amount of profit you make; and You can expect to make a future profit from the appreciation of the assets used in the farming activity. Self employment taxes Presumption of profit. Self employment taxes Your farming or other activity is presumed carried on for profit if it produced a profit in at least 3 of the last 5 tax years, including the current year. Self employment taxes Activities that consist primarily of breeding, training, showing, or racing horses are presumed carried on for profit if they produced a profit in at least 2 of the last 7 tax years, including the current year. Self employment taxes The activity must be substantially the same for each year within this period. Self employment taxes You have a profit when the gross income from an activity is more than the deductions for it. Self employment taxes If a taxpayer dies before the end of the 5-year (or 7-year) period, the period ends on the date of the taxpayer's death. Self employment taxes If your business or investment activity passes this 3- (or 2-) years-of-profit test, presume it is carried on for profit. Self employment taxes This means the limits discussed here do not apply. Self employment taxes You can take all your business deductions from the activity on Schedule F, even for the years that you have a loss. Self employment taxes You can rely on this presumption in every case, unless the IRS shows it is not valid. Self employment taxes If you fail the 3- (or 2-) years-of-profit test, you still may be considered to operate your farm for profit by considering the factors listed earlier. Self employment taxes Using the presumption later. Self employment taxes If you are starting out in farming and do not have 3 (or 2) years showing a profit, you may want to take advantage of this presumption later, after you have had the 5 (or 7) years of experience allowed by the test. Self employment taxes You can choose to do this by filing Form 5213. Self employment taxes Filing this form postpones any determination that your farming activity is not carried on for profit until 5 (or 7) years have passed since you first started farming. Self employment taxes You must file Form 5213 within 3 years after the due date of your return for the year in which you first carried on the activity, or, if earlier, within 60 days after receiving a written notice from the IRS proposing to disallow deductions attributable to the activity. Self employment taxes The benefit gained by making this choice is that the IRS will not immediately question whether your farming activity is engaged in for profit. Self employment taxes Accordingly, it will not limit your deductions. Self employment taxes Rather, you will gain time to earn a profit in 3 (or 2) out of the first 5 (or 7) years you carry on the farming activity. Self employment taxes If you show 3 (or 2) years of profit at the end of this period, your deductions are not limited under these rules. Self employment taxes If you do not have 3 (or 2) years of profit (and cannot otherwise show that you operated your farm for profit), the limit applies retroactively to any year in the 5-year (or 7-year) period with a loss. Self employment taxes Filing Form 5213 automatically extends the period of limitations on any year